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Demand Side Economics – Definition

Demand Side Economics Definition

It is a school of economic thought introduced by John Meynard Keynes, that argues the economic growth is directly proportionate to the demand for products and services. It contradicts the classical economic theory, supply-side economics that asserts economic growth depends on the production and supply of goods and services.

A Little More on What is Demand-Side Economics

Keynes shaped this theory after the 1930s great depression in response to the economic crisis. Before the great depression, classical economics was dominant but that thought failed to explain the condition during the depression. According to the classical theory, the economic balance would be reestablished over time through the market forces of supply and demand. This theory was defied during the great depression as the market failed to restore the economic equilibrium and the unemployment was on the rise. The economists advocating for the classical theory failed to explain this widespread unemployment and downfall of the economy.

Keynes argued the growth of economy does not rely on the supply of the products, rather it is the demand in the market that stimulates the growth. He explained, during the great depression the workers were unemployed, and factories were idle because there were no demands for the products. As the products were not sold in the market, the manufacturers stopped producing those goods thus the workers were not needed. He argued in this situation the market cannot reestablish the balance without creating demands. Keynes advocated for government intervention in creating the market demand during recession or depression for promoting growth.

Keynes’s theory shifted the paradigm of economic study from supply to demand. In later years Keynesian economists developed the theory and established a new school of thought.

Keynesian economists argue, if there is a lack of demand in the market and people are unable to buy goods, the government can intervene by altering interest rates or selling or buying government-issued bond, in other words by pushing more money into the market. They believe that would increase the buying capacity of the consumers which in effect will increase the demand in the market. Once the demand is on the rise the manufacturers would be interested to produce more goods and that would generate employment.

References for Demand-Side Economics

Academic Research on Demand-Side Economics

Demand side management policies for residential water use: who bears the conservation burden?, Renwick, M. E., & Archibald, S. O. (1998). Land Economics, 343-359. The main aim of this paper is to study the urban demand side management policies which are regarded as a water resource management tool. This paper analyses the rate at which alternative policies such as subsidies for water-efficient technologies, use and quantity restriction and price effect or cause a reduction in the demand, as well as their implication inasmuch as distribution in the household, is concerned. The result obtained from a detailed household-level panel data obtained from two different Californian communities was used to explain the terms of reduction in distribution and aggregate demand for water-saving among households.

Demand-side view of electricity markets, Kirschen, D. S. (2003). IEEE Transactions on power systems18(2), 520-527. According to this study, another perspective (the demand side) of the electricity market was explained. The distribution, sales and purchase of electricity across communities were discussed in this paper.

Supply-side economics: An analytical review, Lucas Jr, R. E. (1990). Oxford economic papers42(2), 293-316. In this paper, an analytical view was used in studying the supply aspect of the economics of the DSE (Demand-side economics).

Firms’ decisions where to incorporate, Bebchuk, L. A., & Cohen, A. (2003). The Journal of Law and Economics46(2), 383-425. This paper empirically studies the publicly traded decisions that firms ought to incorporate. It also studies the properties of states that make these decisions more appealing to most incorporating firms and some of the properties of the firm that determines whether they accept or reject the incorporation of these decisions rests on the state of their locations. According to this paper, the states having stronger antitakeover protections are seen as being in the attracting out-of-state incorporations. an estimation which compares whether to adopt the no antitakeover statues as well as adopting of all the standards of the antitakeover statuses enabled by the state that adopt them to more than twice the percentage of the local firm that was incorporated in-state was also estimated.

Demand side management: Benefits and challenges, Strbac, G. (2008). Energy policy36(12), 4419-4426. According to this research paper, the main challenges and benefits of the electricity demand side management were explained using the United Kingdom electricity system as a case study. The decrease in the utilization of networks and generation of about 50% indicates that there is significant scope for the demand side management to contribute to the increase in efficiency of investments in the electricity system. Also, this paper submits an analysis which contains the value of the demand side management in balancing demand and generation of electricity in future of United Kingdom electricity system with a notable and increased variable renewable generation.

Public procurement and innovation—Resurrecting the demand side, Edler, J., & Georghiou, L. (2007). Research Policy36(7), 949-963. This paper argues that demand is an important source of innovation, yet the most important role of demand is by acting as a key driver as far as innovation remains important in government policies. Hence, this study examines the public earnings as a major element of demand-oriented innovation policy. This paper explains the new significances of obtaining public ideas for innovation strategies at the EU level as well as in the range of the European countries. The conclusion drawn from this study is the confrontation of the public procurement method with two of the most common objections to it and by considering future options.

Consumer “accomplices” in product counterfeiting: a demand-side investigation, Bloch, P. H., Bush, R. F., & Campbell, L. (1993). Journal of consumer marketing10(4), 27-36. This paper studies the role of the consumer in the overprovision of product counterfeiting. It also defines a demand-side orientation as being the counterfeiting problem and explains the result obtained from a field experiment which studies the willingness of the consumer in selecting a fake cloth. One of the assumptions drawn from this study is that most consumers will select a counterfeit good even when they are aware of the product inasmuch as there is a price advantage.

Product differentiation, monopolistic competition and city size, Abdel-Rahman, H. M. (1988). Regional Science and Urban Economics18(1), 69-86. This study explained the integrated supply and demand approach to the formation of cities in a spatial economy. The demand consideration which most times is in for of the consumer agglomeration economies which is also known as the variation in the product is seen as a major cause of urban accumulation. Focusing on the supply side, the scale economies are employed and both sides were examined by using the Dixit-Stiglitz model of the monopolistic competition to explain the optimum and equilibrium size of the city. The distribution of the population in a system having two cities discussed and the subsidy scheme which produces an equilibrium city size corresponding to the first optimum was analyzed.

Do residential water demand side management policies measure up? An analysis of eight California water agencies, Renwick, M. E., & Green, R. D. (2000). Journal of environmental economics and management40(1), 37-55. In other to access the alternative demand side management policy and the potential of price as an urban water resource management tool, an econometric model known as the residential demand is firstly formulated and estimated. This econometric model then incorporates the alternative DSM policy instruments (such as allocation of water, use restrictions and public education/awareness) and increase the block pricing schedules. Result obtained from this study showed that both the price and the alternative demand side management policies were effective in reducing the demand.

Earnings functions: testing for the demand side, Hartog, J. (1985). Economics Letters19(3), 281-285. In other to explain the labour market phenomena, one may have to grade workers simultaneously by education and jobs- by the level of complexity and difficulty. According to the Human capital theory, the earnings based on the worker’s ability are the only estimable factor. However, Thurow’s believe in the segmented labour market theory examines that only the job level is regarded as important while the assignment theory believes that both variables are of equal importance. By making use of three different sets of data gotten from The Netherlands, a test which shows convincingly the superiority of the assignment theory was carried out and explained.

Job security, employment and wages, Bertola, G. (1990). European Economic Review34(4), 851-879. This paper records that the job security provisions are mostly seen as the main factor contributing to the increase in the rate of unemployment in most European economies. However, such provisions do not bias labour demand towards the reduced level of employment at given wages. They bias the determination of wages towards higher wages. Hence, this paper explains the job security processes as well as employment and wages.

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